Tuesday, June 5, 2012

Tech Patent Wars Ongoing

There is a conflict going on in the technology space that many investors are still not aware is occurring. The ongoing battle involves the future of the industry and who the winners will be. The ongoing turf war involves innocuous items, often overlooked...patents.

All of today's tech devices could not exist without a myriad of patents. It is estimated, for example, that inside the average smartphone is embodied about 250,000, often overlapping patents of various kinds from both the computing and the mobile communications world.

All of these varied patents have multi-billion dollar lawsuits flying between among some of the best-known names in the technology industry including Samsung, Facebook (Nasdaq: FB), Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT). In the aforementioned smartphone business alone, where much of the legal action is occurring, $15-$20 billion has been spent in the last year alone buying up patents with legal bills conservatively estimated at half a billion dollars.

Proof of this new force at work in the technology industry came nearly a year ago when patents owned by bankrupt telecom equipment manufacturer Nortel Networks fetched $4.5 billion at auction. That was five times the initial estimate!

Among the losers at the auction, when compared to Apple and Microsoft, was Google. So what did it do? Several weeks later, it went out and spent $12.5 billion for Motorola Mobility. The main reason behind this deal was so Google could get its hands on Motorola's intellectual property.

And the action continues unabated. Just last month, Microsoft paid $1.1 billion for a number of important patents held by AOL (NYSE: AOL). All parties involved seemed to benefit. AOL received a lot of cash for patents it was not longer using, while Microsoft took home some of the first social networking patents ever granted. Facebook, a Microsoft partner, is now insulated form the possible legal attacks which would have followed if those patents had gotten in some other companies' hands.

This latest transaction again highlighted what is going on in the industry.....

The haves, cash-rich companies like Apple and Google, are buying up lots of legal protection for their business from the former leaders in the industry such as Nortel, AOL, Motorola and even Kodak that have little valuable left except for their intellectual property. In the long run, this could stifle innovation in that only giant companies may be able to compete in promising new areas like smartphones and social networking since they will be the only ones with the financial wherewithal to not only afford buying patents but also fend off lawsuits (think of the Yahoo versus Facebook lawsuit).

In the past, when this was not such a litigious society, disputes between converging technologies like the radio and the telegraph were settled amiably with cross-licensing agreements which benefited all the parties involved. But such an outcome today is highly unlikely...many more lawsuits are sure to follow soon. Some likely ones which come to mind are Yahoo suing Twitter, Amazon suing Facebook, and Amazon being sued by the tablet computer companies including Apple.

That's what makes technology investing so tough today. Picking the right company in which to invest may not come down to who has the best product or the best management, but who hires the best lawyers. Or who has the most cash with which to snap up the most patents. That likely means firms like Apple and Google may be on top longer than expected and perhaps for many years to come.
This article was originally written for the Motley Fool Blog Network. Make sure to read all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.

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